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JPMorgan's Legal Woes May Ebb Soon

Financial Times has reported that the legal woes at JPMorgan Chase & Co. (JPM) are expected to lessen soon. The company is in advanced talks with the Securities and Exchange Commission (:SEC) for the settlement of probes related to the sale of risky residential mortgage-backed securities (RMBS).

The allegation pertains to how Bear Stearns Cos. – acquired by JPMorgan in 2008 – repackaged and sold residential loans to the investors. The SEC is conducting an inquiry into accusations against Bear Stearns that claimed that after receiving compensation from the loan originators for failed mortgages, the firm did not transfer the same to a trust that was managing RMBS. Moreover, the SEC is probing disclosures made to the investors regarding the renegotiated loans.

Further, both the parties of the settlement deal are yet to agree upon the penalty to be paid and the other conditions to be fulfilled. However, JPMorgan’s fine is not expected to exceed the penalty paid by The Goldman Sachs Group, Inc. (GS) in 2010. Goldman had paid $550 million to settle the SEC allegation of misleading investors in collateralized debt obligation (:CLO) – Abacus 2007-AC1.

Apart from JPMorgan, the other large banks that are facing the SEC inquiry for selling risky RMBS include Citigroup, Inc. (C), Credit Suisse Group (CS) and Wells Fargo & Company (WFC).

If the settlement with JPMorgan is finalized, it will be a major victory for the SEC, which has been investigating the role of these securities prior to the financial crisis. For JPMorgan, this would be a breather as it would slightly lower the legal and regulatory inquiries it has been encountering since the financial crisis.

Yet, JPMorgan continues to face many other probes and lawsuits from the investors and regulators pertaining to its role during the crisis. Along with these, the company is facing investigations for the trading debacle it reported in May this year, its alleged role in rigging the LIBOR rates and for money laundering.

JPMorgan currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. However, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.